Prowling tiger

India pushes anew for special economic zones

India's efforts to replicate China's conspicuously successful development of special economic zones (SEZs) began to generate controversy as soon as the policy came into force in early 2006. Opposition has ranged from complaints by government ministers to violent protests against acquisitions of rural land for SEZs, prompting the government to place SEZ approvals on hold in January-April 2007. However, SEZ development now seems to be back in full swing, notwithstanding some recent tweaking of the guidelines to mollify critics. Some 36 new SEZs were approved on June 22nd, bringing the total number approved to 339.

SEZ attractions

The rationale behind India's SEZ policy is quite straightforward. Inadequate infrastructure continues to head the list of companies' woes in India, constraining firms that compete overseas in export markets and deterring foreign companies looking at India as a manufacturing base. Since establishing world-class industrial infrastructure throughout India will be an extremely expensive, long-term endeavour, the next best solution is to build pockets of excellent infrastructure in the form of SEZs. By offering various incentives to private developers, the government is also attracting private investment for setting up such zones, easing the financial burden of a task that has traditionally been the responsibility of the state.

Proposals for SEZ projects in India have to be approved by a committee composed of central government bureaucrats from various ministries. After a project is approved, SEZ developers are entitled to a number of fiscal incentives, such as exemption from income tax for ten years and from customs duties. The government also offers a host of incentives to firms setting up units in SEZs. In bureaucracy-heavy India, where regulations and required procedures create significant headaches, an important incentive is “single window” clearance from central and state government authorities.

A flurry of projects

Attracted by the commercial returns and incentives on offer, a large number of entities—including Indian and foreign companies, real-estate developers and state government agencies—have submitted project proposals for SEZs. In addition to the 339 SEZ projects that have been formally approved, another 170 proposed projects have received in-principle approval.

The Ministry of Commerce and Industry, which is the architect and implementer of the SEZ policy, views it as a major initiative for expanding exports, improving infrastructure, attracting foreign and domestic investment, and providing employment. The ministry estimates that the SEZs formally approved thus far could provide investment of Rs3trn (about US$74bn) and create around 4m jobs. The Ministry also estimates that exports from SEZs set to become operational in the 2008/09 fiscal year (April-March) will exceed Rs1trn in that year. However, because most of the people affected by SEZ development—primarily by the acquisition of land—are agricultural workers who do not expect to receive any benefit from the new zones, the projects have continued to generate serious opposition.

Land acquisition

In part because India is a democracy, acquiring land for infrastructure projects has often been problematic. People who are displaced by projects and receive inadequate compensation can express their dissatisfaction openly through political participation and protest. When land is acquired for use by private companies--as opposed to infrastructure projects such as roads meant for public use--the level of dissatisfaction is often higher. A common perception is that SEZ projects are mere land-grabbing exercises, with real estate being acquired at unfairly low costs. In January-March this year opposition to land acquisition turned violent in Nandigram, West Bengal, where a chemicals SEZ was being planned by Indonesia's Salim group. Around 20 people lost their lives in clashes between police, farmers and political workers.

However, the SEZs themselves are not necessarily the focus of these disputes; any policy involving land acquisition is bound to arouse opposition. The land-acquisition disputes also needs to be seen in a broader perspective. Total land required for the SEZ projects that had received formal or in-principle approvals as of mid-June amounted to about 1,845 sq km—less than 0.1 % of India's land area. In this light, the controversy surrounding the displacement of farmers and the loss of arable land appears somewhat exaggerated.

SEZ critics have expressed other concerns as well. For instance, some argue that the incentives offered to developers are too generous and will result in a large amount of foregone revenue for the government. The response from supporters of the SEZ policy is that most of these incentives are already being offered to exporters and infrastructure developers through other schemes—the SEZ policy merely offers them as a package.

Recent policy changes

Land-acquisition problems have forced New Delhi to make some policy changes. In April 2007 the central government announced an upper limit of 5,000 ha (50 sq km) on the area of SEZs. State governments were directed not to undertake any forced land acquisitions and were authorised to prescribe an even lower limit on the area of SEZs. Meanwhile, the central government's Ministry of Rural Development is in the process of formulating a comprehensive resettlement and rehabilitation policy, according to which SEZs will be required to provide a livelihood for at least one person from each displaced family.

This tweaking of the SEZ policy to make land acquisition more politically acceptable is an expedient solution. However, the changes will make it more difficult for the policy to fulfil the lofty expectations of its proponents. If SEZs are expected to provide world-class infrastructure, they need to be large enough to contain the necessary airports, road links and the like. And if they are to boost industrial capacity, they need to be large enough to benefit from economies of scale. But many of the recently approved SEZ projects are so small that their chief advantage appears to be the fiscal incentives. This is strikingly evident from a comparison of the size of SEZs in China and India. The average size of SEZs approved in India is a mere 4 sq km--a tiny fraction of the size of their Chinese counterparts. China's SEZ in Shenzhen is a massive 327 sq km. Placing further limitations on the size of India's SEZs could make their task of emulating the success of SEZs in China a distant dream.